EXAMINATION
ECON FIRST 200
FALL, 2009
1. (12 points) Suppose Country A has 40 workers and each worker can produce either 3 units of food or 1
unit of clothing. Country B has 10 workers and each worker can produce either 6 units of food or 6 units
of clothing.
(a) Draw in separate diagrams the production possibilities frontier for each country. Place clothing on
the horizontal axis and food on the vertical axis. Be sure to label the intercepts and the slope on your
diagrams.
(b) Which country has absolute advantage in the production of clothing? Defend your answer in 1-2
sentences.
(c) Which country has comparative advantage in the production of clothing? Defend your answer in 1-2
sentences.
(d) Suppose that in the absence of trade, Country A produces and consumes 60 units of food and 20 units
of clothing, while Country B produces and consumes 30 units of food and 30 units of clothing. Someone
proposes the following agreement:
Country A will produce only food and no clothing. Country B will produce only clothing and no
food. Country A will give 30 units of food to Country B in exchange for 20 units of clothing.
Will Country A accept the agreement? Will Country B accept the agreement? Defend your answer in 23 sentences.
2. (10 points) Draw separate demand and supply diagrams for parts (a) and (b) of this question. Assume
throughout this question that the laws of supply and demand hold in the red wine market.
In January, the equilibrium price of red wine is P0 and the equilibrium quantity of red wine is Q0
(a) In February, a new study shows that drinking red wine lowers the probability of having a heart attack.
In February, the equilibrium price of red wine is P1 and the equilibrium quantity of red wine is Q1.
(i) Will the new equilibrium price P1 be greater than, less than, or equal to P0? Defend your answer
in 1-2 sentences.
(ii) Will the new equilibrium quantity Q1 be greater than, less than, or equal to Q0? Defend your
answer in 1-2 sentences.
(b) In March, a late frost destroys part of the red grape crop. As a result, the price of red grapes (which
are used to produce red wine) rises. Consumers remain convinced that drinking red wine reduces the
chances of a heart attack. In March, the equilibrium price of red wine is P2 and the equilibrium quantity of
red wine is Q2.
(i) Can you be certain that the new equilibrium price P2 will be greater than P0? Defend your answer
in 1-2 sentences.
(ii) Can you be certain that the new equilibrium quantity Q2 will be greater than Q0? Defend your
answer in 1-2 sentences.
3. (12 points) Five people (Anna, Ben, Chris, Diana, and Ed) are thinking of buying homes in College
Park. Their willingness to pay for a home in College Park is as follows:
Anna
Willingness to Pay
Ben
Chris
Diana
Ed
$120
$100
$80
$60
$20
There are five homebuilders in College Park (Builder 1, 2, 3, 4, and 5). Each is small and can build at
most one home. Their cost of building a home is as follows:
Builder 1 Builder 2
Cost
Builder 3
Builder 4
Builder 5
$30
$70
$90
$110
$50
(a) Suppose we wanted to maximize total surplus in the College Park housing market. (i) Which people
should buy a home? Defend your answer in 1-2 sentences.
(ii) Which homebuilders should provide those homes? Defend your answer in 1-2 sentences.
(iii) What will total surplus be? Defend your answer in 1-2 sentences.
(b) Suppose the College Park housing market is competitive. Suppose further that the equilibrium price
of a home in College Park is $75.
(i) Which people would buy a home at this price? Defend your answer in 1-2 sentences.
(ii) Which homebuilders would provide those homes? Defend your answer in 1-2 sentences.
(iii) What will consumer surplus be in this market? Defend your answer in 1-2 sentences.
(iv)What will producer surplus be in this market? Defend your answer in 1-2 sentences.
(v) What will total surplus be in this market? Defend your answer in 1-2 sentences
Multiple Choice
1)
You
observe that the price of a good rises and the quantity decreases. These observations can be the result of the
A)
demand curve shifting rightward.
B)
supply curve shifting leftward.
C)
supply curve shifting rightward.
D)
demand curve shifting leftward.
2)
For the
first
milkshake purchased Nick is willing to pay $4, for the second milkshake $3, for the third milkshake $2 and for
the fourth milkshake $1. The price of milkshakes is $2. What is the value of Nick's consumer surplus?
A)
$2
B)
$3
C)
$9
D)
$10
3)
If there
are no external costs, the market supply curve shows the quantity supplied at each price and also shows the
A)
marginal
social benefit from each unit of the good.
B)
total surplus
of the good.
C)
marginal
social cost of each unit of the good.
D)
maximum
4)
price for which suppliers will sell each unit of the good.
Which of the following correctly describes how price adjustments eliminate a shortage?
A)
As the price
rises, the quantity demanded increases while the quantity supplied decreases.
B)
As the price
falls, the quantity demanded decreases while the quantity supplied increases.
C)
As the price
rises, the quantity demanded decreases while the quantity supplied increases.
D)
As the price
5)
falls, the quantity demanded increases while the quantity supplied decreases.
Suppose a country produces bikes only and clothing. The country achieves an efficient allocation of resources when
A)
it produces
equal amount of bikes and clothes.
B)
the marginal social cost of a bike equals the marginal social cost of clothes.
C)
the marginal social benefit of consuming a bike equals the marginal social cost of producing a bike.
D)
the prices
6
)
charged for the goods are as low as possible.
If the
price of
one good increases by 3 percent and the quantity demanded of another good increases by 2 percent, the cross
price elasticity is ________ and the two goods are ________.
A)
3/2,
substitutes
B)
2/3,
complements
C)
2/3,
substitutes
D)
3/2,
complements
7)
Bus rides and canned soup are inferior goods, so the ________ elasticity of demand is ________.
A)
income;
positive
B)
cross price;
negative
C)
income;
negative
D)
cross price;
8)
positive
Inferior
goods are those for which demand increases as
A)
income
decreases.
B)
income
increases.
C)
the price of a substitute falls.
D)
the price of a
9)
substitute rises.
After
e Katrina devastated parts of Mississippi and New Orleans in 2005, we can be sure that the production
Hurrican possibilities frontier for that area temporarily
A)
definitely
shifted outward, away from the origin.
B)
definitely
shifted inward, toward the origin.
C)
definitely
became steeper.
D)
definitely
10)
became flatter.
A point
inside a production possibilities frontier
A)
is always
preferred to points outside the production possibilities frontier.
B)
is
unattainable.
C)
could indicate that some resources are unemployed.
D)
is more
11)
efficient than points on the production possibilities frontier.
Which of the following shifts the supply curve for gasoline rightward?
A)
a situation in which the quantity demanded exceeds the quantity supplied
B)
an increase in the demand for gas-guzzling, sport utility vehicles
C)
a decrease in the price of a resource used to produce gasoline, such as crude oil
D)
an increase in the price of gasoline
12)
Unit
elastic demand means that the
A)
demand curve is vertical.
B)
ratio of a
percentage change in the quantity demanded to a percentage change in the price equals 1.
C)
ratio of a
change in the quantity demanded to a change in the price equals 1.
D)
demand curve is horizontal.
13)
While
g on the production possibilities frontier, if additional units of a good could be produced at a constant
producin opportunity cost, the production possibilities frontier would be
A)
bowed inward.
B)
upward
sloping.
C)
a straight line.
D)
bowed
14)
outward.
A
conducts a survey of students, which shows that a 10 percent tuition decrease would lead to a 12 percent
universit increase in enrollment. If the university wants to increase its total revenue, it should ________ tuition because
y
the demand for education at this university is ________.
A)
raise; elastic
B)
lower;
inelastic
C)
raise; inelastic
D)
lower; elastic
Point
A
B
C
D
E
15)
Production
of cheese
(tons)
0
250
500
750
1,000
Production
of wine
(gallons)
1,000
900
700
400
0
The
above
table shows the production possibilities frontier for the economy of Arkadia. The opportunity cost of increasing
cheese production from 500 tons of cheese to 750 tons of cheese is
A)
300 gallons of wine.
B)
700 gallons of wine.
C)
250 tons of
cheese.
D)
100 gallons of wine.
16)
For
rs, goods A and B are complements. The cost of a resource used in the production of A decreases. As a result,
consume
A)
the
equilibrium price of B will rise and the equilibrium price of A will fall.
B)
the
equilibrium prices of both A and B will rise.
C)
the
equilibrium prices of both A and B will fall.
D)
the
equilibrium price of B will fall and the equilibrium price of A will rise.
17)
For most goods, the price elasticity of demand is greater in the long run than the short run because
A)
in the long run people have more ways to avoid purchasing the good whose price has risen.
B)
inflation
increases all prices and incomes over time.
C)
people's
incomes tend to increase over time.
D)
in the long run all price elasticities are equal to 1.
18)
Demand is perfectly inelastic when
A)
shifts in the
supply curve results in no change in price.
B)
the good in
question has perfect substitutes.
C)
shifts of the
supply curve results in no change in the total revenue from sales.
D)
shifts of the
19)
supply curve results in no change in quantity demanded.
The law of demand states that, other things remaining the same, the higher the price of a good, the
A)
smaller is the demand for the good.
B)
larger is the
quantity of the good demanded..
C)
larger is the
demand for the good.
D)
smaller is the quantity of the good demanded.
20)
People
buy more of good 1 when the price of good 2 rises. We can be certain that these goods are
A)
complements.
B)
inferior goods.
C)
substitutes.
D)
normal goods.
21)
Taco
Bell's
economists determine that the price elasticity of demand for their tacos is 2. So, if Taco Bell raises the price of
its tacos by 6 percent, the quantity demanded will decrease by ________ percent.
A)
3
B)
6
C)
12
D)
2
22)
In the
above figure, if the price is $2, then the total consumer surplus will be
A)
area abc.
B)
area adec.
C)
area cef.
D)
area bdfc.